I think many misunderstand the role of xrp in RippleNet. To understand it you must understand the difference between what payment is and what settlement is. When you initialise money transaction band or FI first make payment. The payment usually consists of crediting bank contacting beneficiary bank, exchange messages about value being transferred, transaction fees, customer KYC etc. No actually money is being moved in this process. This is what SWIFT protocol does and what essentially xCurrent does. xCurrent modern day payment solution which process payments in order of magnitude better than SWIFT. For e.g. every bilaterally exchanged info is digitally signed and every misformed data is detected. This way xCurrent protocol guarantees transaction completion. With Swift protocol around 6% transactions are lost due to obsolete system no validating every data integrity being transferred between nodes.
The second stage of transaction is settlement. This actually means moving money. Before beneficiary Bank can credit it's customer with received payment, the payment must be settled. In conventional system this is done either by physically moving money from bank A to bank B or use system of so called nostro accounts. Nostro account is an account your bank or 3rd party bank holds a funded account in beneficiary bank (CLS banks). This is expensive and slow to do it because you have to have a lot of dormant money in foreign banks abroad or have to pay fees to every FI which is on the settlement path. Also due to slow settlement completion you have to insure cross border transaction to exchange price fluctuation. Because of expensive and clogged way the nostro accounts operate the money transfer is usually done once per day in so called batch payments. This is also why this days cross border remittances are so slow and expensive.
This is where xrp comes to play. Xrp ledger is open sourced and decentralised blockchain protocol to transfer value from point A to point B. Transactions on xrp ledger can be settled in under 4 sec for a fraction of a cent in terms of fees. Also xrp ledger is permissionless meaning anybody can run node and validate transactions on ledger without any special permission. Especially you don't need to be approved by ripple or added to Ripple's UNL (universal node list) to participate in transaction validation. There are many independent validators not under ripple's control.
How does it fit into RippleNet? For RippleNet to be realtime gross settlement system or RTGS, it is missing fast real-time transaction settlement. By real-time I mean that transaction is completed and settled in short time frame when it was issued (up to few minutes but no more then 5 min). This is where xrp ledger fits in. Xrp can already be used directly by FIs in xCurrent protocol to settle transaction or it can be used indirectly via xRapid or 3rd partly liquidity providers. Xrp ledger is a tool to fast gather liquidity for your transaction from multiple pools in real-time. You don't need to directly see xrp in your transaction when you initialise payment but xrp can be used in transaction without you or your bank realising it's being used.
E.g. Bank A transfer 100$ from USA to bank B. Bank B receives payment in euros (80.64€). Bank A will use 3rd party liquidity provider which uses xRapid to settle this transaction. The path goes as follows: Bank A credits it's liquidity provider with 100$ -> liquidity provider buys from open market (or already have) 100$ worth of xrp -> transfers xrp to bank's B liquidity provider or bank B directly -> bank B debits it's liquidity provider or liquidity provider sells xrp for euros on open market and transfer the money to bank B.
In this example xCurrent guaranteed transaction path and xRapid via xrp ledger settled the transaction. The execution of such transaction should be completed in about 3 mins instead of 3 days or more.
Some general concerns:
S: Banks which are using xCurrent will not use xrp.
A: They don't need to but with xCurrent they save 30% of charges. Using xrp on the path can save bank up to 60% per transactions. Why would not FI which already is participating in RippleNet now use full solution that Ripple offers?
S: Banks could make there own cryptocurrency.
A: There is not one unity of banks. There are big corporation banks tied to politics and governments and there are small independent banks which mostly pay high fees to the big guys to manage the tx settlement. Because of banking nature banks are in constant competition. Everything in banking system and FI system revolves around trust. Why would my bank use your bank's coin? Xrp is here as independent, decentralised, arbitrary medium so banks do not need to trust each other.
S: Swift can create it's own bc solution.
A: Swift already played with the ideal of making bc solution. They made PoC solution named SWIDT gpi based on hyperledger. Altho it was only PoC there solution was made to upgrade and fix their existing payment protocol not settlement. It enhanced the nostro account path finding, not the settlement itself. Besides it had to open 500 channels for 30 participants, for the whole system it's estimated around 100k channels needed to be open. Xrp ledger is single blockchain solution. You only have to be connected to one single channel / ledger in order to participate in global economy.
S: Banks could use bitcoin to settle transactions.
A: Altho bitcoin brought the blockchain technology to the world it has some drawbacks to be replacement for trustless settlement protocol. Namely slow transaction random confirmation time and small transaction throughput which leads to high transaction fees when transactions clog up the system is small concern. Greater problem with bitcoin protocol is that it relies on random PoW mechanism which is not censorship resistant. Transaction can be in any time censored or orphaned and you do not have any mechanism to detect rogue miner.
On the contrary xrp relies on deterministic consensus algorithm. Every validator has identity and any malicious validator can be detected and you can remove it from your UNL. One example: Transaction that was not accepted in the current ledger block must be accepted in the very next one. The validator which opposed can be safely determined as rogue and be removed from UNL. Xrp ledger also does not consume enormous amount electricity in order to prevent double spending attack.
Latest Comments
Betting On Ripple To Challenge Bitcoin: Think Twice
I think many misunderstand the role of xrp in RippleNet. To understand it you must understand the difference between what payment is and what settlement is. When you initialise money transaction band or FI first make payment. The payment usually consists of crediting bank contacting beneficiary bank, exchange messages about value being transferred, transaction fees, customer KYC etc. No actually money is being moved in this process. This is what SWIFT protocol does and what essentially xCurrent does. xCurrent modern day payment solution which process payments in order of magnitude better than SWIFT. For e.g. every bilaterally exchanged info is digitally signed and every misformed data is detected. This way xCurrent protocol guarantees transaction completion. With Swift protocol around 6% transactions are lost due to obsolete system no validating every data integrity being transferred between nodes.
The second stage of transaction is settlement. This actually means moving money. Before beneficiary Bank can credit it's customer with received payment, the payment must be settled. In conventional system this is done either by physically moving money from bank A to bank B or use system of so called nostro accounts. Nostro account is an account your bank or 3rd party bank holds a funded account in beneficiary bank (CLS banks). This is expensive and slow to do it because you have to have a lot of dormant money in foreign banks abroad or have to pay fees to every FI which is on the settlement path. Also due to slow settlement completion you have to insure cross border transaction to exchange price fluctuation. Because of expensive and clogged way the nostro accounts operate the money transfer is usually done once per day in so called batch payments. This is also why this days cross border remittances are so slow and expensive.
This is where xrp comes to play. Xrp ledger is open sourced and decentralised blockchain protocol to transfer value from point A to point B. Transactions on xrp ledger can be settled in under 4 sec for a fraction of a cent in terms of fees. Also xrp ledger is permissionless meaning anybody can run node and validate transactions on ledger without any special permission. Especially you don't need to be approved by ripple or added to Ripple's UNL (universal node list) to participate in transaction validation. There are many independent validators not under ripple's control.
How does it fit into RippleNet? For RippleNet to be realtime gross settlement system or RTGS, it is missing fast real-time transaction settlement. By real-time I mean that transaction is completed and settled in short time frame when it was issued (up to few minutes but no more then 5 min). This is where xrp ledger fits in. Xrp can already be used directly by FIs in xCurrent protocol to settle transaction or it can be used indirectly via xRapid or 3rd partly liquidity providers. Xrp ledger is a tool to fast gather liquidity for your transaction from multiple pools in real-time. You don't need to directly see xrp in your transaction when you initialise payment but xrp can be used in transaction without you or your bank realising it's being used.
E.g. Bank A transfer 100$ from USA to bank B. Bank B receives payment in euros (80.64€). Bank A will use 3rd party liquidity provider which uses xRapid to settle this transaction. The path goes as follows: Bank A credits it's liquidity provider with 100$ -> liquidity provider buys from open market (or already have) 100$ worth of xrp -> transfers xrp to bank's B liquidity provider or bank B directly -> bank B debits it's liquidity provider or liquidity provider sells xrp for euros on open market and transfer the money to bank B.
In this example xCurrent guaranteed transaction path and xRapid via xrp ledger settled the transaction. The execution of such transaction should be completed in about 3 mins instead of 3 days or more.
Some general concerns:
S: Banks which are using xCurrent will not use xrp.
A: They don't need to but with xCurrent they save 30% of charges. Using xrp on the path can save bank up to 60% per transactions. Why would not FI which already is participating in RippleNet now use full solution that Ripple offers?
S: Banks could make there own cryptocurrency.
A: There is not one unity of banks. There are big corporation banks tied to politics and governments and there are small independent banks which mostly pay high fees to the big guys to manage the tx settlement. Because of banking nature banks are in constant competition. Everything in banking system and FI system revolves around trust. Why would my bank use your bank's coin? Xrp is here as independent, decentralised, arbitrary medium so banks do not need to trust each other.
S: Swift can create it's own bc solution.
A: Swift already played with the ideal of making bc solution. They made PoC solution named SWIDT gpi based on hyperledger. Altho it was only PoC there solution was made to upgrade and fix their existing payment protocol not settlement. It enhanced the nostro account path finding, not the settlement itself. Besides it had to open 500 channels for 30 participants, for the whole system it's estimated around 100k channels needed to be open. Xrp ledger is single blockchain solution. You only have to be connected to one single channel / ledger in order to participate in global economy.
S: Banks could use bitcoin to settle transactions.
A: Altho bitcoin brought the blockchain technology to the world it has some drawbacks to be replacement for trustless settlement protocol. Namely slow transaction random confirmation time and small transaction throughput which leads to high transaction fees when transactions clog up the system is small concern. Greater problem with bitcoin protocol is that it relies on random PoW mechanism which is not censorship resistant. Transaction can be in any time censored or orphaned and you do not have any mechanism to detect rogue miner.
On the contrary xrp relies on deterministic consensus algorithm. Every validator has identity and any malicious validator can be detected and you can remove it from your UNL. One example: Transaction that was not accepted in the current ledger block must be accepted in the very next one. The validator which opposed can be safely determined as rogue and be removed from UNL. Xrp ledger also does not consume enormous amount electricity in order to prevent double spending attack.
References:
ripple.com/build/xrp-ledger-consensus-process/
https://www.youtube.com/watch?v=7abKUs9tYZg
https://github.com/ripple/rippled
medium.com/.../how-to-run-a-ripple-validator-digitalocean-7e5fca1c3d77
https://bithomp.com/validators
twitter.com/.../members
en.wikipedia.org/wiki/Real-time_gross_settlement
en.wikipedia.org/wiki/Nostro_and_vostro_accounts
www.investopedia.com/terms/n/nostroaccount.asp
https://en.wikipedia.org/wiki/CLS_Group
www.quora.com/How-does-the-settlement-of-payments-work-in-banks-Specifically-how-do-payment-systems-that-are-connected-to-multiple-banks-actually-settle-the-amount-between-two-banks
www.swift.com/file/7131/download?token=XzHk1ySb
www.swift.com/.../swift-gpi